Spending is up, just not for retailers

There’s a general perception these days that Australian consumers are not the economic force they once were. Chastened by the shock of the global financial crisis, consumers are thought to be hunkering down by spending less and using more of their income to pay down debts.

While there’s perhaps an element of truth in this perception, a fascinating analysis from the economics team of the Commonwealth Bank of Australia suggests the reality is far more complex.

CBA economist James McIntyre has dug into the details of recent consumer spending patterns.

He finds “consumer spending has actually been growing . . . consumers are spending, but they’re not spending where they used to".

This has important implications for macro-economic policy: if consumer spending is chugging along nicely, it adds to the case for policy to be tightened sooner rather than later.

And, at the micro level, CBA’s analysis is a heads up for retailers: consumer spending patterns are ever evolving and you had better be up to date with the latest trends.

For starters, CBA notes that, at the aggregate national accounts level, consumer spending in nominal terms rose by 6 per cent over the past year. That’s just shy of the 6.5 per cent decade average.

I’d add the same is broadly true for real consumer spending, which is up 3.2 per cent over the past year, compared with average annual growth of 3.5 per cent over the noughties.

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But delving into the details, there’s a big difference in consumer spending at the retail and non-retail levels.

Retail spending includes food, tobacco, clothing, household goods, dining out and other goods – and these days this accounts for a mere 35 per cent of total consumer spending recorded in the quarterly national accounts.

The retail share of nominal spending has been trending down for decades – back in the early 1960s, for example, retail accounted for almost 60 per cent of total consumer spending.

In its place has been a big increase in spending on housing, and smaller increases in health, education, communications and recreation.

As we’ve become wealthier, less of the household budget has needed to go on food and clothing and we’ve responded by splurging on better housing, fancy mobile phones, entertainment and improving our minds and bodies.

Over the past year retail spending, as estimated from the monthly retail sales report, grew by only 1.7 per cent in nominal terms. That’s similar to the 1.5 per cent growth in the retail component of the national accounts measure of consumer spending. So, overall, the monthly retail report is a fair representation of retail sales in the national accounts.

The big discrepancy is what’s happening in non-retail spending. Again, as estimated by CBA, nominal non-retail spending grew by 2.4 per cent in the June quarter, up a hefty 8.2 per cent over the past financial year.

The strength in nominal non-retail spending reflects firm growth in prices and volumes.

By my calculations, non-retail spending grew by 4.5 per cent over the past year, compared with only 0.9 per cent for retail spending.

And the biggest non-retail gains in real spending were for cars (up 22.9 per cent), financial services (up 6.6 per cent), health (up 5.6 per cent) and recreation (4.6 per cent).

Non-retail prices, moreover, rose 3.8 per cent over the past year, compared with inflation of only 0.7 per cent in the retail sector. The usual culprits are responsible for non-retail price inflation, with utility costs up 15.5 per cent, housing costs up 7.9 per cent, education up 5 per cent and petrol up 4.8 per cent. And there’s some evidence of spending shifts in response to price variations.

Falling prices for cars and recreation perhaps helps explain the solid growth in volumes in both areas, while the use of petrol and electricity is down over the past year as their prices rose solidly during that time.

Cigarette volumes were only flat in the face of a tax-led 14 per cent surge in prices.

Overall, due to stronger price and demand pressures in the non-retail sector, the picture of consumer spending painted by the monthly retail sales reports has become less relevant over time – particularly so over the past year.

It’s against this background that we should also observe recent tentative signs of a pick-up in retail spending.

As noted by the CBA, retail sales growth has accelerated to a 6 per cent annualised pace over the past six months.

The bank feels this could be partly due to a MasterChef-related surge in dining out and kitchen equipment.

However, we’ll need to see the more detailed national accounts to be sure that the increased spending on creme brulees has not come at the expense of other forms of non-retail recreation.